James Grant on Irving Fisher and the Great Depression

In the past weekend edition (January 4-5, 2014) of the Wall Street Journal, James Grant, financial journalist, reviewed (“Great Minds, Failed Prophets”) Fortune Tellers by Walter A. Friedman, a new book about the first generation of economic forecasters, or business prophets. Friedman tells the stories of forecasters who became well-known and successful in the 1920s: Roger Babson, John Moody, the team of Carl J. Bullock and Warren Persons, Wesley Mitchell, and the great Irving Fisher. I haven’t read the book, but, judging from the Grant’s review, I am guessing it’s a good read.

Grant is a gifted, erudite and insightful journalist, but unfortunately his judgment is often led astray by a dogmatic attachment to Austrian business cycle theory and the gold standard, which causes him to make an absurd identification of Fisher’s views on how to stop the Great Depression with the disastrous policies of Herbert Hoover after the stock market crash.

Though undoubtedly a genius, Fisher was not immune to bad ideas, and was easily carried away by his enthusiasms. He was often right, but sometimes he was tragically wrong. His forecasting record and his scholarship made him perhaps the best known American economist in the 1920s, and a good case could be made that he was the greatest economist who ever lived, but his reputation was destroyed when, on the eve of the stock market crash, he commented “stock prices have reached what looks like a permanently high plateau.” For a year, Fisher insisted that stock prices would rebound (which they did in early 1930, recovering most of their losses), but the recovery in stock prices was short-lived, and Fisher’s public reputation never recovered.

Certainly, Fisher should have been more alert to the danger of a depression than he was. Working with a monetary theory similar to Fisher’s, both Ralph Hawtrey and Gustav Cassel foresaw the deflationary dangers associated with the restoration of the gold standard and warned against the disastrous policies of the Bank of France and the Federal Reserve in 1928-29, which led to the downturn and the crash. What Fisher thought of the warnings of Hawtrey and Cassel I don’t know, but it would be interesting and worthwhile for some researcher to go back and look for Fisher’s comments on Hawtrey and Cassel before or after the 1929 crash.

So there is no denying that Fisher got something wrong in his forecasts, but we (or least I) still don’t know exactly what his mistake was. This is where Grant’s story starts to unravel. He discusses how, under the tutelage of Wesley Mitchell, Herbert Hoover responded to the crash by “[summoning] the captains of industry to the White House.”

So when stocks crashed in 1929, Hoover, as president, summoned the captains of industry to the White House. Profits should bear the brunt of the initial adjustment to the downturn, he said. Capital-spending plans should go forward, if not be accelerated. Wages must not be cut, as they had been in the bad old days of 1920-21. The executives shook hands on it.

In the wake of this unprecedented display of federal economic activism, Wesley Mitchell, the economist, said: “While a business cycle is passing over from a phase of expansion to the phase of contraction, the president of the United States is organizing the economic forces of the country to check the threatened decline at the start, if possible. A more significant experiment in the technique of balance could not be devised than the one which is being performed before our very eyes.”

The experiment in balance ended in monumental imbalance. . . . The laissez-faire depression of 1920-21 was over and done within 18 months. The federally doctored depression of 1929-33 spanned 43 months. Hoover failed for the same reason that Babson, Moody and Fisher fell short: America’s economy is too complex to predict, much less to direct from on high.

We can stipulate that Hoover’s attempt to keep prices and wages from falling in the face of a massive deflationary shock did not aid the recovery, but neither did it cause the Depression; the deflationary shock did. The deflationary shock was the result of the failed attempt to restore the gold standard and the insane policies of the Bank of France, which might have been counteracted, but were instead reinforced, by the Federal Reserve.

Before closing, Grant turns back to Fisher, recounting, with admiration, Fisher’s continuing scholarly achievements despite the loss of his personal fortune in the crash and the collapse of his public reputation.

Though sorely beset, Fisher produced one of his best known works in 1933, the essay called “The Debt-Deflation Theory of Great Depressions,” in which he observed that plunging prices made debts unsupportable. The way out? Price stabilization, the very policy that Hoover had championed.

Grant has it totally wrong. Hoover acquiesced in, even encouraged, the deflationary policies of the Fed, and never wavered in his commitment to the gold standard. His policy of stabilizing prices and wages was largely ineffectual, because you can’t control the price level by controlling individual prices. Fisher understood the difference between controlling individual prices and controlling the price level. It is Grant, not Fisher, who resembles Hoover in failing to grasp that essential distinction.

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8 Responses to “James Grant on Irving Fisher and the Great Depression”

  1. 1 Blue Aurora January 8, 2014 at 12:56 am

    I agree with your criticisms of James Grant, David Glasner. Out of curiosity…do you recall that he was interviewed on a recent documentary about the Federal Reserve System? I believe I mentioned it to you before. Please see the following link:


  2. 2 doncoffin64 January 8, 2014 at 12:08 pm

    I thought Grant’s book “Money of the Mind” was a very interesting read, but I also thought its conclusion (that “debt-based” money was inevitably inflationary and should not exist) was sadly wrong. As I was reading his WSJ review last weekend, I again though he was interesting, but, again wrong. In both cases, because he allowed his preconceptions to shape his analysis.

  3. 3 Tom January 8, 2014 at 12:18 pm

    While I mostly agree with the criticism of Grant, and I’m no fan of gold standards, I think this article and the entire “gold standard caused the depression” theory is essentially historically revisionist.

    The gold standard had been the basis of money essentially forever, and before the 1930s practically nobody, certainly not Hawtrey or Cassel, imagined doing away with it permanently. So it’s nonsense to single out the gold standard as the cause of the depression. The gold standard had been a background feature of all economies since before paper money was introduced. Along the way there were many intermittent recessions and depressions, as well as many booms and overall great progress.

    What’s more the immediate explanation of a “botched restoration” of the gold standard after its wartime suspension just doesn’t stand up. The economy was booming years after the restoration.

    Surely the French and US tightening of 1928 precipitated the sharp 1929 recession. But in the age of national economies and central banks, during and since the gold standard era, the vast majority of recessions have been preceded by monetary policy tightening. Blaming the tightening for the recessions implies that one believes eternally loose monetary policies would avoid recessions, which seems a tad myopic.

    Fisher in his 1932 book Booms and Depressions and the 1933 essay you cite took a more realistic view. He discussed at length the 1920s credit and equity bubbles, which in retrospect were unsurpassed till the 1990s-2000s. The 1929 crash turns out to be very similar to but more severe than the 2008 crash. The great concentration of wealth in margined equity accounts was more vulnerable to sudden implosion than anything we had in 2008. That implosion might have been even more severe had the bubble not been popped when it was.

    Another question is why the crash lasted so long. The arguments by Grant and other Austrians that Hoover interventionism prolonged the depression aren’t convincing at all. I think Fisher was right that central banks should have reinflated.

    In a sense that’s the same as saying: abandon the gold standard. And though he doesn’t put it this way, I read Fisher’s 1932-1933 works as demonstrating how the overlay of increasingly complex modern banking and growing international trade over the traditional gold standard was vulnerable to debt-deflation busts. But saying the gold standard caused the depression is going much too far.

  4. 4 David Glasner January 8, 2014 at 4:34 pm

    Blue Aurora, Thanks for the link. I haven’t seen the film, but I did watch the trailer and some of the discussions. Obviously, it is a very one-sided presentation of designed to advance a particular position about monetary policy. But the critics seem to think it was a very good documentary.

    Don, We do seem to be on the same page, don’t we?

    Tom, I’m not sure what you mean by historically revisionist, but I will say when I blame the Great Depression on the gold standard, I am using a shorthand term (sound-bite) for a more complicated argument in which the gold standard is a key element, but not the whole story. Under the right set of policies, the Great Depression could have been avoided without leaving the gold standard. So if by “cause the Great Depression” you mean that the gold standard was “a necessary and sufficient condition for the Great Depression, I agree that it did not cause the gold standard.

    There are two specific points that you make that I do disagree with. First, until 1925, I don’t think that any important country other than the US restored the gold standard. It was only after Britain rejoined in 1925, and especially after France’s de facto stabilization in 1926 that there was a significant movement back on to the gold standard. That was when the danger of rejoining the gold standard became acute, because it was then that the monetary demand for gold began increasing, especially in 1928 when France enacted legislation requiring the Bank of France to convert its foreign exchange reserves into gold, followed soon after by a tightening by the Fed. Second, stock prices in 1929 were not overvalued relative to projected earnings had economic growth continued. There was a deliberate attempt by the Fed to raise rates sufficiently to cause a break in stock prices, which succeeded, but in the process precipitated a completely unnecessary downturn in the world economy.

  5. 5 Blue Aurora January 8, 2014 at 9:29 pm

    David Glasner: Yes, the trailers for the film did make it seem to be an anti-Fed film. But if you looked at the personalities interviewed…you’ll notice that the creators of the film took the time not to make it into another thinly-disguised hackneyed rant by a conspiracy theorist against the Federal Reserve. All of the people interviewed are critical of the Federal Reserve – but not for the same reasons. (I doubt Alan Blinder and Allan Meltzer would see eye-to-eye on what the Federal Reserve has been doing, for instance.) I still have yet to see the documentary, but I’m hoping I won’t be disappointed.

  6. 6 (Luis) Miguel Navascués January 10, 2014 at 12:14 pm

    David, I think leveraging reached the highest level before the crash, level only similar to the one previous to our crisis – one strong similarity. I think is misguided not to take account of this factor.

  7. 7 David Glasner January 12, 2014 at 10:51 am

    Blue Aurora, You are right that the producers of the film included a lot of opposing viewpoints from Fed officials, former officials, and sympathizers. That’s one reason why many critics have praised it. And so I probably should not have said that it is extremely one-sided. What I should have said is that it tries very hard to make the case that the Fed, at a very basic level, is the cause of our current distress and should be replaced by a different monetary regime. The film is clearly dedicated to an anti-Fed policy agenda. I have big problems with Fed policy, but I don’t subscribe to policy agenda of the makers of the film.

    Luis, Sorry, but I don’t see the connection between your comment and what I was saying. Can you spell it out for me?

  8. 8 (Luis) Miguel Navascués January 13, 2014 at 10:07 am

    Well, I mean that the monetary contraction is much more deflationary as much higher is the level of debts. I think that the debts accumulated previously of 1929 were an important deflationary factor

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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